Credit card insurance: don't believe the hype

Policies are lucrative for card firms, unnecessary for many consumers

By Lisa Rogak

At first glance, a credit card insurance policy sounds like a great deal: For mere pennies on every $100 of debt, your credit card bills will be paid even if you don't have the money. Sounds like a bargain, right?

As with everything in life, however, if it sounds too good to be true, it probably is. Though many cardholders believe a policy will pay off the card completely, the reality is that most plans only cover the minimum payments. And even if you have the insurance, the company may make it difficult for you to collect.

Variations on a theme
Though programs and coverage will vary, there are four basic types of credit insurance:

Credit life insurance pays off the credit card balance owed at the time of the cardholder's death.

Credit disability insurance will make the minimum payment due for a specified period after a medical disability. Purchases made after the disability are generally excluded.

Credit involuntary unemployment insurance will cover the minimum payment if a cardholder is laid off for a specific period of time. Charges incurred after the layoff are excluded, and if you're fired, you're not covered.

Credit property insurance pays for credit card purchases if the items are damaged or, in some cases, stolen.

Nearly all credit card companies offer some form of credit insurance for a couple of very good reasons. "Some card companies really push credit insurance because the policies are extremely profitable," says Dennis O'Brien, president and founder of Coastal Financial Advisors. Indeed, the Center For Economic Justice estimates that credit insurance generates over $2 billion in revenue each year.

"It's always easiest to sell to your existing customers," adds Peter Bielagus, a licensed financial adviser and author of "Getting Loaded: Make A Million While You're Still Young Enough To Enjoy It."

Solicitations can come from a telemarketer, a flier tucked in with your statement or even a customer service rep who's helping you authorize a new card. They're also starting to show up in e-mail and online banner ads. Then, if you sign up, the issuer gets a cut of the sale from the insurance company -- which is usually an outside partner rather than an sister company or affiliate -- as does the phone rep who's trying to get you to sign up.

Bait and switch
According to Ken Clark, a certified financial planner and author of the forthcoming book "The Complete Idiot's Guide to Getting Out of Debt," the phone pitch typically describes the best-case scenario of how the insurance will work. "Very often, there are numerous exclusions for what type of death, disability or unemployment will be covered by the policy," he says. "In addition, there are often waiting periods or deductibles that prevent someone with a minor crisis from benefiting."

Unlike other kinds of insurance, credit insurance doesn't require a signature to purchase a policy. In many cases, all you have to do is verbally agree over the phone. With one popular offer, the first 30 days are free, and you'll only be billed after that period. What they don't mention is that it's often difficult to cancel, and Clark notes that it's not unheard of for an unscrupulous representative to sign you up without your consent.

In fact, it's happened to him at least twice in the last 10 years. After receiving multiple phone calls from his credit card companies offering the service -- he declined both times -- a monthly fee appeared on his statements anyway. The charges were removed after he called the company. "The customer service rep was confused and asked why I signed up if I didn't want it."

A bad deal
Financial experts agree that most people don't need credit card insurance for several reasons.

First, there's a very good chance you're already covered by another insurance policy. If your employer offers a standard $50,000 life insurance or short-term disability policy, you're covered. In addition, homeowners' insurance typically will pay for damaged property.

Also, other insurance policies are generally cheaper. "For example, term life insurance costs less and provides better coverage than a credit card policy," says Steven S. Camp, banking partner in the Dallas office of Gardere Wynne Sewell LLP. And if you have three credit cards, you'll need three separate credit card insurance policies to be sure you're totally covered.

Other forms of insurance provide more flexibility. "With credit card disability insurance, the policy will only make the card payments," says Bielagus. "With a traditional disability policy, the cardholder receives a check from the insurance company and can decide who and how much to pay."

The burden of proof
There's another problem. Collecting on a claim can be difficult, and the burden of proof is on the policy holder.

In the case of disability, the insurer often requires reports from doctors and hospitals, along with copies of medical tests and diagnoses. To collect on an involuntary unemployment claim, a cardholder will need to submit copies of bank statements, applications for unemployment and checks and proof that you're looking for a new job. If you land part-time employment, your claim will probably be denied because most companies pay only if you're 100 percent unemployed.

Since both disability and unemployment may be short-term, many cardholders conclude that the leg work required to collect for a minimum payment of $30 a month isn't worth the effort.

Furthermore, some cardholders have found out the hard way that even when their claim is approved, the payment from the insurance company may show up late or not at all, which can increase your balance with late fees, raise your interest rate on all of your credit accounts, and lower your credit score. These additional charges can easily exceed the minimum payment, putting you even further in the hole.

The irony is that the insurance companies will generally only pay an account in full if you have the great misfortune to die. After all, that can easily be proven with a death certificate.

Should anyone buy credit insurance?
"The people who need it the most are those folks who simply cannot get insurance elsewhere," says Bielagus. "The chief virtue of credit insurance is that it's easy to get. If you have a pre-existing condition that prevents you from getting life or disability insurance, then credit insurance might be worth considering."

O'Brien suggests that people who work in industries where layoffs and temporary unemployment cycles are frequent should consider involuntary unemployment insurance, though he admits it's not the best option. "If you're in this type of industry, it's better to put some money away for the expected periods of unemployment," he says. "It's also a good idea to have a fall-back employment option so you can work elsewhere if this happens frequently." Similarly, he adds that if your industry has a high rate of disability, the insurance may be worthwhile, but disability insurance is a much better option.

But he and other experts agree that it's a better idea to self-insure by making a small deposit each month into a savings account to draw on for the minimum payment. After all, it's better than opting for a plan that may not deliver if you find yourself facing financial challenges in case of disability or unemployment.

Published: November 7, 2008

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